Oil prices experienced a drop on Tuesday (April 21), reversing the gains made in the previous session. This decline is attributed to expectations that peace talks between the US and Iran will occur this week, potentially allowing for increased supply from the critical oil-producing region in the Middle East.

Brent futures fell by 95 cents, or one percent, reaching US$94.53 (S$120) as of 12:03 AM GMT (8:03 AM SGT).

US West Texas Intermediate (WTI) crude futures for May decreased by US$1.54, or 1.72 percent, to $88.07. The May contract is set to expire on Tuesday, while the more active June contract dropped by US$1.09, or 1.3 percent, to US$86.37.

Both benchmarks surged on Monday, with Brent rising by 5.6 percent and WTI by 6.9 percent, following Iran's closure of the Strait of Hormuz, a vital oil transport route, and the US seizing an Iranian cargo ship as part of its blockade of Iranian ports.

Investors are now focusing on the potential outcome of this week's talks, with hopes for either an extension of the current ceasefire or a final agreement, despite ongoing risks of further conflict and oil flow disruptions.

A senior Iranian official informed Reuters on Monday that Iran is contemplating participation in the peace talks in Pakistan, following Islamabad's efforts to resolve the US blockade.

This blockade has significantly hindered Tehran's ability to engage in peace negotiations, with the current two-week ceasefire set to end this week.

Analysts at Citi noted, "We continue to lean toward an MOU being signed and/or the ceasefire being extended this week, potentially evolving into a broader agreement." However, they also expressed readiness to adjust their outlook toward a longer disruption scenario should the negotiations fail.

Highlighting the uncertainty surrounding the talks, the Iranian official emphasized that no decision has been made regarding attendance, with Iranian Foreign Minister Abbas Araqchi stating that "continued violations of the ceasefire" by the US are obstructing further negotiations.

In a separate statement, Iran's chief negotiator and parliament speaker, Mohammad Baqer Qalibaf, reiterated that Tehran would not engage in negotiations under threats.

Shipping activity through the Strait of Hormuz, a crucial passage for about one-fifth of the world's oil supply, remained limited on Monday.

If disruptions in the strait persist for another month, total losses could escalate to approximately 1.3 billion barrels, with prices likely nearing US$110 per barrel in the second quarter of 2026, according to Citi.

Additionally, Kuwait has declared force majeure on oil shipments due to the blockade of the strait, as reported by Bloomberg News.

The heightened prices resulting from the closure of the strait have already reduced oil demand by about three percent, according to analysts at Societe Generale in a client note.

The risk is "skewed toward larger losses the longer normalization is delayed," they stated, adding that they expect "full normalization" of supply not to occur until late 2026.